Risk management is an important part of any trading decision. One important way to control your trading risk is by setting stop loss exits. A stop loss exit is a practical tool used in risk management. However, there is an art of developing the right stop loss exit strategy.
On the one hand, you dont want to set too tight stops that you constantly get bumped out of the market. On the other hand, you dont want to get too liberal with your stops that you never lock in a profit.
Entry and exit for each trade is very important. Your exits must be carefully coordinated with your entries. The topic of setting stop loss exits generally falls under the heading of trading systems. This is a trading skill that you can only learn with experience.
There are a variety of stops that you can incorporate into your trading system. The following sevens are the most valuable:
1. Initial Stop: Whenever you enter a trade, put a stop loss first. It is the largest loss that you are going to take in the current trade. This stop is identified before you enter the market. This is the first stop set at the very beginning of the trade. The initial stop is also used to calculate your position size.
2. Trailing Stop: Using trailing stops is a good idea. This stop trails the price action. A trailing stop locks in profits when the price action is reversed. Trailing stops develop as the market develops. The trailing stop lets you lock in profit as the market moves in your favor.
3. Resistance Stop: Trend is your friend as long as you ride it in the right direction. A resistance stop is placed just under the countertrend pullbacks in a trend. This is a form of a trailing stop used in trends.
4. Three Bar Trailing Stop: Many traders cant anticipate a trend reversal and lose the unrealized gains when there is a sudden trend reversal. This stop is used in a trend when the market seems to be losing momentum and you anticipate a reversal in trend.
5. One Bar Trailing Stop: This stop is used when there is a breakaway market and you want to lock in profits. When the prices have reached your profit target zone, use this stop after three to five bars move strongly in your favor.
6. Trendline Stop: Use this stop when you are riding an uptrend or a downtrend. You always want to get out when the prices close on the opposite side of the trendline. Use a Trendline Stop placed under the lows in an uptrend or on top of highs in a downtrend.
7. Regression Channel Stop: A regression channel usually represents the width of the trend channel. A regression channel forms a channel between the highs and lows of the trend. Stops are placed on the outside of the lows of the channel on uptrends and outside the highs of the channel in downtrends. Prices should close outside the channel for the stop to be taken.
If you find yourself being stopped out too frequently or if you seem to be getting out of the trend too early then most probably you are trading with a fearful mindset. Try to overcome your fear and place your stops at reasonable places in the market.
Author Resource:
Mr. Ahmad Hassam is a Harvard University Graduate. Learn These Candlestick Patterns . Try These 1500 Pips A Day Forex Signals from heaven!
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